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Shotgun, soupcans & the mountains?

July 20, 2010

Would heading to the mountains with a shotgun and a carload of soupcans in fear of the stock market fallout from the current economic situation be an example an example of markets overcorrecting?

Well, this piece from the NY Times Business section attempts an answer of sorts.

It’s about an Elliot Wave theorist who thinks a vritual 300-year stock market storm is looming.

What would that look like? Maybe I should let Mr Prechter – that is his name – say it in his own words:

“I’m saying: ‘Winter is coming. Buy a coat,’ ” he said. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”

Well, if you put it like that…

What does Mr Prechter offer to support these claims?

..he said that no other forecaster was likely to accept his reasoning, which is based on his version of the Elliott Wave theory — a technical approach to market analysis that he embraces with evangelical fervor.

Originating in the writings of Ralph Nelson Elliott, an obscure accountant who found repetitive patterns, or “fractals,” in the stock market of the 1930s and ’40s, the theory suggests that an epic downswing is under way, Mr. Prechter said. But he argued that even skeptical investors should take his advice seriously.

And why shouldn’t they?

But perhaps my favourite part was Mr Prechter’s eclectic CV:

Mr. Prechter, 61, lives in Gainesville, Ga., where he runs Elliott Wave International, a forecasting and publishing firm. He graduated from Yale as a psychology major in 1971, dabbled as a singer, drummer and songwriter in a rock band and became a technical analyst for Merrill Lynch.

He became fascinated by Mr. Elliott’s writings, which suggest that the market moves in predictable if complex patterns. Along with A. J. Frost, Mr. Prechter wrote “Elliott Wave Principle,” a 1978 book that predicted the emergence of a great bull market — a forecast that was largely fulfilled. By 1987, he was widely regarded as an expert in technical analysis. Articles in The New York Times said he was known as “the market’s leading technical guru” — and more. An article in October that year said he had “emerged as both prophet and deity, an adviser whose advice reaches so many investors that he tends to pull the market the way he has predicted it will move.”

He has far less day-to-day influence now, after years spent developing a theory he calls “socionomics,” which holds “social moods” as the cause not only of market cycles but also of economic and political events. A grand cycle is ending, he says, and the time for reckoning is at hand near.

Amen.

Actually, I don’t mean to ridicule Mr Prechter. But it is a very entertaining character piece. And it shows that the market does aggregate a wide range of (sometimes creepy) perspectives.

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